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Tuesday, September 11, 2012

SEC Must Defend Negligence Case in Stanford Ponzi Scheme

Per www.bloomberg.com:

By David Voreacos and Susannah Nesmith -
Sep 8, 2012

The U.S. Securities and Exchange
Commission must defend a negligence lawsuit alleging that the
agency failed to act appropriately after concluding that R. Allen Stanford was operating a Ponzi scheme, a judge ruled.
Investors Carlos Zelaya and George Glantz may proceed with
a claim that agency examiners determined four times before 2009
that Stanford was running a Ponzi scheme, U.S. District Judge
Robert Scola Jr. ruled yesterday in federal court in Miami.
Stanford is serving 110 years in prison for his $7 billion
fraud.
The lawsuit claims the SEC had a “nondiscretionary duty”
to report Stanford to the Securities Investor Protection Corp.,
which compensates victims, after examinations in 1997, 1998,
2003 and 2004. The SEC sued Stanford in February 2009, alleging
a “massive fraud” at Antigua-based Stanford International
Bank.
“Accepting the plaintiffs’ allegations as true, the
Securities and Exchange Commission was obligated to report
Stanford’s company to the Securities Investor Protection
Corp.,” Scola ruled. “This obligation to report was not
discretionary because the controlling statute mandates that the
report be made.”
The judge ruled that the next stage of the litigation may
be more appropriate for the SEC to raise the agency’s argument
that it hadn’t concluded before 2009 that Stanford was running a
Ponzi scheme. Investors still face several legal hurdles.
SEC spokesman John Nester declined to comment.

Sovereign Immunity

In a Feb. 14 court filing, the SEC urged Scola to dismiss
the complaint, filed under the Federal Tort Claims Act, because
it couldn’t overcome the agency’s sovereign immunity.
The agency argued that it was shielded from liability
because it had discretion in determining whether to take
enforcement or regulatory action against Stanford.
“The SEC enjoys complete discretion under the 1934
Securities Exchange Act in deciding whether and how to
investigate suspected wrongdoing,” according to the filing.
“Based on these sweeping grants of authority, courts have
uniformly dismissed FTCA suits challenging SEC decisions
regarding whether and how to investigate alleged wrongdoing.”
Scola also dismissed the investor claims that the SEC had a
duty to deny renewal of the Stanford annual registration.
In 2010, the SEC’s inspector general issued a report
criticizing the four earlier investigations of Stanford’s
operations. The examiners concluded as early as 1997 that
Stanford was “likely operating a Ponzi scheme,” it said.

Scheme’s Complexity

Each time, the agency decided against a full investigation.
Investigators with the SEC’s enforcement division were also
notified by whistle-blowers that Stanford might be operating a
Ponzi scheme, and failed to follow up, the report said.
The inspector general found that investigators shied away
because of the scheme’s complexity, preferring to tackle easier
topics because the staffers felt they were being evaluated based
on the number of cases they made.
“As a result, cases like Stanford, which were not
considered ‘quick-hit’ or ‘slam-dunk’ cases were not
encouraged,” the inspector general found.
Investor attorney Gaytri Kachroo said yesterday the judge’s
decision was the first to overcome the SEC’s sovereign immunity.
“The ruling handed down today is a bold statement and a
warning to the government: if you fail to carry out your
statutory obligations to protect the public against wrongdoing
with massive repercussions to the investing public, you will be
held liable,” Kachroo said in a statement.
The case is Zelaya v. United States, 11-cv-62644, U.S.
District Court, Southern District of Florida (Miami).